There are three crucial periods during the typical divorce: Before, during and after. Each contains its own peculiar problems. There are some mistakes you can make after you have decided to get divorced bur before it is finalized.
Most have to do with money but all deal with emotion. The overall thing to remember is that, during an emotional time, keep your head about you and try to think clearly.
Mistake people make
Your cash flow can get tight during a divorce and it's tempting to liquidate long-term investments to satisfy a short-term need. Obviously, such a move doesn’t help you down the road – money that isn’t invested is no longer working toward your financial goals.
What most people forget in this situation is the tax implications. When you disinvest, you pay taxes on that money and in some cases, get hit with an IRS penalty of 10 percent if you are under a certain age.
Also, if you are on the receiving end of a qualified domestic relations order (QRDO), you can elect to take it as cash now or roll it into a retirement fund. Cash now usually means a higher tax bracket while a retirement fund means a tax-free investment.
Don’t forget the 2017 tax changes. Spouses used to get a tax break on alimony (aka spousal support). That is no longer the case for divorces final after Dec. 31, 2018. Since most spouses ordered to pay alimony are the ones who make more money and are in a higher tax bracket, this loss of a deduction needs to be considered.
Houses and pensions
It’s enticing to try to keep the house. It is, after all, most likely your biggest investment as well as the repository of memories and emotion. But the house might not be such a good long-term investment:
- The mortgage might be bigger than the house is worth
- The neighborhood might be on a downward trend
- You might not be able to afford an adequate standard of living while trying to maintain the house
Also, remember that just because you and your spouse agree on an issue, other people or organizations don’t have to comply. For example, you and your spouse may agree that you will receive your spouse’s pension. However, the pension plan administrator is under no obligation to release the pension before your spouse retires, and even then the administrator doesn’t have to release it in a lump sum rather than monthly payments.
The end result: Getting the pension isn’t such a good deal.